Good day and thank you for standing by. Welcome to the J&J Snack Foods Fiscal 2023 Fourth Quarter Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Norberto Aja, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2023 Fourth Quarter Conference Call. We will start in just a minute with management's comments and your questions. But before doing so, let me take a minute to read the safe harbor language. This call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call may not relate to matters of historical fact but should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, expectations, and objectives as well as our anticipated financial performance. These statements are neither promises nor guarantees that involve known and unknown risks, uncertainties, and other important factors that may cause results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Factors discussed in our annual report on Form 10-K for the year ended September 30, 2023, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call today. Any such forward-looking statements represent management's estimates after the date of this call, November 16, 2023. While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause expectations to change. In addition, you may also reference certain non-GAAP measures on the call today, including adjusted EBITDA, operating income, or earnings per share, all of which are reconciled to the nearest GAAP measures in the company's earnings press release, which can be found in the Investor Relations section of our website. Joining me on the call today is Dan Fachner, our Chief Executive Officer; along with Mr. Ken Plunk, our Chief Financial Officer. Following management's prepared remarks, we will go ahead and open the call for a question-and-answer session. With that, I would now like to turn the call over to Mr. Dan Fachner, J&J Snack Foods Chief Executive Officer. Please go ahead, Dan.

Thank you, Norberto, and good morning, everyone. We appreciate you joining us this morning to discuss J&J Snack Foods Fiscal 2023 Fourth Quarter and Full-Year Results. J&J had a great ending to our fiscal year. We delivered record high net sales and profitability for both the three and 12-month periods with improved gross profit margins. Our results underscore the tremendous progress we are making across the organization, thanks to the dedicated efforts of our employees and the positive impact of the strategic initiatives undertaken over the past two years. Our topline results marked the sixth consecutive quarter and the third consecutive year of double-digit net sales growth, totaling $443.9 million, up 10.8% for the quarter and $1.56 billion, up 12.9% for the year, reflecting $178 million in incremental sales. More importantly, our results were driven by continued growth across all three of our business segments on both a quarterly and a full-year basis, highlighting the health of our business and consumer appeal for our products and brands. I am pleased with the success of our work to improve margins and drive profitability. Gross margin improved at 32.8% and 30.1% for the quarter and year, respectively, and we lowered distribution expense as a percentage of revenue for both periods. This led to operating income and adjusted EBITDA increasing by 93% and 55.2%, respectively, for the fourth quarter and 77.2% and 46.3%, respectively, for the whole year. Ken will review our financial performance in more detail in just a few minutes. As I reflect on the year, our company has never been more aligned in its vision and strategy. We ended this year with strong momentum across our business segments, guided by five core strategies: grow and protect our brands; dominate core categories; sell across the portfolio; invest in our future; and embrace our culture. We are collaborating better than ever and finding new sales opportunities across our portfolio. This strategy is aligned with our financial goals to grow sales above the market, create expense leverage, and grow profits faster than sales. I would like to highlight a few of the successes from the fourth quarter that support our strategy. Let me start with our focus on our strategies to grow our core brands and products and how we are collaborating and cross-selling across the organization. We increased our marketing investment and added new production lines to support growing opportunities with SUPERPRETZEL. In the fourth quarter, we launched filled jalapeno nuts nationwide with a major theater customer and introduced a private label Bavarian Pretzel with a major food service distributor. In retail, I am pleased to report that we gained a SUPERPRETZEL availability with Walgreens while also expanding PretzelDogs with new retail customers. In addition, we launched frozen SUPERPRETZEL Bavarian sticks with major grocery and mass merchant customers. Looking ahead to fiscal 2024, we are planning to launch a system-wide Pretzel Croissant with a strategic convenience customer. We also expect to be able to further expand frozen SUPERPRETZEL products among major retailers throughout the year and have plans to add fresh-baked SUPERPRETZEL Bavarian sticks and buns to the in-store bakery category of several strategic customers. Moving on to our ICEE brand. I'm very proud of our frozen beverage team for delivering a record quarter and year of sales and profitability. We continue to make progress growing consumption and placement of our ICEE and SLUSH PUPPIE brands in amusement, mass merchandisers, and restaurants. Also, the theater industry continues to gain momentum, and our Mexico team delivered another stellar quarter and year. As we look forward, our team is rolling out a self-serve program to a major club store customer in early fiscal 2024, and we continue to have positive momentum with tests in QSR and family entertainment channels. Turning to Hola! Churros. We are very pleased with the success of this brand in its first year. Sales grew over 23% for the year and 8% for the fourth quarter. With the production capacity we added this year, we have a strong pipeline of growth opportunities. This quarter, we executed the retail rollout of Hola! brand Churros in the Northeast with several regional grocery retailers. We also successfully completed a market test with a major QSR sandwich chain for Churros that will begin to roll out system-wide in early calendar 2024. The best example of how we are executing product development and leveraging cross-selling opportunities is in Dippin' Dots. You may recall we closed the acquisition of Dippin' Dots in June 2022. In the first year under J&J's ownership, the brand achieved all-time record high sales and profitability, growing over 13% and 80%, respectively. We are bringing new flavors to the market like the recently launched ICEE Cherry and Blue Raspberry ICEE flavor, the best smooth flavor launch in Dippin' Dots' history. We are looking forward to next year's launch of a new cookie dough offering called Frozeti Dough. Our rollout for Regal Theaters is almost complete, and we are adding test locations for two other major theater chains and expect to continue building our presence in the theater channel in 2024. Also, we are testing a vending program in amusement parks, clubs, theaters, and entertainment venues and have an in-store freezer test with a major convenience store. We also remain laser-focused on improving our go-to-market strategies, including finding added cross-selling opportunities, securing new client wins, and entering and growing in new geographic markets. We are excited about the opportunities ahead of us in the international markets, such as Mexico. We have recently added an international business development leader to identify opportunities to expand key products and brands like SUPERPRETZEL, Hola! Churros, and Dippin' Dots into new markets. Our product portfolio extends across over a dozen product categories from soft pretzels, churros, and handhelds to bakery goods, dog treats, and frozen beverages. We also sell into more than a dozen distinct venues, including school cafeterias, theaters, amusement parks, airports, stadiums, supermarkets, as well as restaurants and convenience stores. Our team is aligned and focused on driving plans to leverage our portfolio of products to add growth across our many channels and customers. As we've discussed for the last couple of years, one of our core strategies is to build capability and invest in our future. Let me begin with our warehousing network. I am pleased to report that we now have two new regional distribution centers open, one in Texas and the other in New Jersey. We are on track to open the third RDC in Arizona in early calendar 2024. The three RDCs will be used to store and distribute most of our products as we decrease our points of distribution from over 30 to less than 10. This will include added freezer storage capacity for Dippin' Dots, which is really the key to our growth plans for that brand. It will also result in improved customer service and lower distribution costs. We expect this initiative to provide at least $10 million in annual cost savings as we ramp up over the next two years. As you know, we partnered with NFI over a year ago to manage our logistics and transportation network and are seeing efficiency improvements that are lowering shipping, handling, and storage costs. NFI now manages all of our transportation network, improving truck capacity and routing, and enhancing customer service. We are also just beginning to leverage the six recently added state-of-the-art production lines as we add production capacity to our core products, such as pretzels, churros, and frozen novelties. Not only do these lines provide more capacity, they are creating production efficiency and higher output metrics through better automation. Transitioning to M&A, we continue to be highly disciplined in our approach. We are evaluating opportunities that complement our brand portfolio and business model and that offer attractive shareholder returns. Financially, we have the resources and the balance sheet to invest in growth when opportunities align. In summary, our momentum is strong, and we are aligned on a strategy that positions us well for continued success in fiscal 2024 and beyond. I am very proud of the J&J teams and their relentless focus on satisfying the consumer every time they enjoy one of our products. Our focus on cross-selling is opening up new opportunities in channels, which creates new selling opportunities across our portfolio. The diverse nature of our business, along with the strength of our brands and the affordable price point of our products is something that we are confident will continue to serve us well. We believe this momentum, combined with improved operational efficiencies, positions J&J to deliver long-term value to our employees, partners, and shareholders. Our success is anchored by a winning culture, and I want to thank our J&J employees for their efforts to deliver a record 2023 year. With that, I would now like to pass the call over to Ken to review our financial performance in more detail. Ken?

Thank you, Dan. To echo Dan's comments, J&J ended fiscal 2023 on a strong note, including record fourth quarter and annual net sales and profitability. I'd like to take a few minutes to walk you through the results. Net sales for the quarter totaled $443.9 million, a 10.8% increase versus the prior year, and sales for the full year totaled $1.56 billion, a 12.9% increase versus full-year fiscal 2022. Our sales results this quarter and fiscal year included an extra week compared to the prior year, contributing an estimated 6.8% and 2% to sales growth, respectively. Foodservice, our largest segment, saw Q4 '23 sales exceed Q4 '22 by $13.5 million to $270.3 million, or an increase of 5.3%, including approximately $35.2 million in sales from the amusement acquisition of Dippin' Dots. We saw continued strong sales across all of our product lines, including a 14.6% increase in pretzels, a 9.7% increase in frozen novelties, an 8.1% increase in churros, and a 2.2% increase in bakery. Dippin' Dots sales increased almost 12% in the quarter. Handheld sales decreased 21.8%, driven primarily by a contractual cost true-up agreement. Volume for core foodservice handheld increased for the quarter. This led to Q4 '23 foodservice segment operating income of $17.5 million, or an increase of 175.8% versus the prior year period, reflecting topline growth as well as improvement in margins and added leverage from lower distribution expenses. Moving to our Retail segment, Q4 '23 retail sales increased 21.2% to $64.8 million compared to Q4 '22. Retail sales were driven by a 205.5% growth in handheld sales, a 32% increase in biscuit sales, and a 16.7% increase in frozen novelties sales, led by Luigi's, Dogsters, and ICEE sticks. Pretzel sales grew by 6.7% versus the prior year period, led by expanded placement of SUPERPRETZEL Bavarian sticks by the Mini Dogs with several retail customers. This resulted in Q4 '23 retail segment operating income of $3.6 million, or an increase of 237% versus the prior year period, driven by topline growth as well as improvement in margins and lower distribution expenses. As it relates to our third segment, frozen beverages segment sales were $108.7 million and beat Q4 '22 sales by 20.6%. Beverage sales grew 24.8%, or $14.2 million higher than Q4 '22, led by double-digit volume growth and healthy consumer trends across key channels, including convenience, amusement parks, mass merchants, restaurants, and theaters. The Barbenheimer effect drove strong theater performance of growth above pre-pandemic levels, as well as higher food and beverage consumption per visit. Machine service revenues increased 6% versus the prior year period, reflecting strong maintenance call volumes, while equipment sales increased 33.2%, representing our second largest year ever and was driven by strong growth from new clients in convenience customers. Q4 '23 operating income in the frozen beverage segment also improved to a record $20.6 million, a $6.4 million increase compared to Q4 '22. Overall, we've made significant progress including gross margin and distribution expenses. Our focus on improving gross margins through an improved mix of core products, better calibration costs, and price and cost of goods efficiencies is clearly benefiting our results. For the quarter, gross profit totaled $145.7 million, a 25.8% increase compared to Q4 '22. This led to a gross margin of 32.8%, favorably comparing to 28.9% in Q4 '22. This allowed us to reach our goal of a 30% gross margin for the full year, a marked improvement from 26.8% for the full year in 2022. Overall, we experienced slight deflation for the quarter. The cost of key ingredients, including flour, oil, dairy, and meats, have declined. We are still experiencing double-digit inflation in sugar sweeteners, which continues to impact products such as frozen novelties and baked goods. Looking at expenses, total operating expenses increased by $9.8 million or 10.4%, representing 23.4% of sales for the quarter compared to 23.5% in Q4 '22. Distribution costs were 2.8% of sales in the quarter, much improved compared to 12.4% in the prior year period. Marketing and selling expenses represented 7% of sales versus 6.4% in the prior period, driven primarily by incremental promotional and marketing support on core brands and new products. Administrative expenses were 5% of sales in Q4 '23 compared to 4.3% in Q4 '22, attributable to higher performance-based bonus payments compared to the prior year and investments in capability. This led to an operating income of $41.7 million or a 93% increase compared to $21.6 million in Q4 '22. Adjusted operating income was $45.8 million, or a 77.8% increase compared to Q4 '22. For the quarter and the year, the extra week contributed an estimated $2 million in operating profit. After the impact of income taxes of $11.3 million compared to $3.9 million in Q4 of fiscal '22, net earnings increased to $30.4 million, resulting in reported earnings per share of $1.57 or $4.08 for the full year. This compares to $0.90 and $2.40 in the prior year period. Adjusted diluted earnings per share were $1.73 for the quarter and $4.50 for the full year compared to $1.05 and $2.76 in the prior year periods. Adjusted EBITDA increased 55.2% to $62.2 million from $40.1 million in the prior year period, and our effective tax rate was 27% in the fourth quarter. Looking at our liquidity position, I'm pleased with our ability to quickly deleverage on the back of the Dippin' Dots acquisition. We were able to reduce our debt from approximately $125 million when we acquired Dippin' Dots to $27 million at the end of fiscal Q4. The focus will continue to be on maintaining a healthy balance sheet and prudent leverage positioning, which positions us to continue investing in the growth of our business and returning value to our shareholders. Our cash and marketable securities at the end of the quarter were $49.6 million. In addition, we have ample availability under our revolver of approximately $188 million in additional borrowing capacity. In summary, we are confident that the decisions we are making and the steps we are taking to transform our company are driving results and laying the foundation for future success. I would now like to turn the call over to the operator for Q&A.

Our first question is from Jon Andersen with William Blair.

Hi. Good morning, everybody. Congrats on the quarter.

Thank you very much, Jon.

Thanks, Jon.

I wanted to clarify your earlier comments regarding a forward-looking thought on a longer-term algorithm. You mentioned sales growth exceeding that of your main end markets, expense leverage, and earnings growth surpassing sales growth. Could you elaborate on that? Did I interpret it correctly as a new approach to convey your perspective on the growth of the business both at the top and bottom line moving forward? Also, could you narrow down your thoughts for 2024 using that framework in relation to end market growth, your growth, and potential margin expansion? Thank you.

Yes. Hey, Jon. This is Ken. Great question, yes. We've been operating kind of under this, what I'd call, financial formula for really the last couple of years and probably haven't stated as clearly as we did in this script, but it really gets to what I've talked about before is we're focused on the entire P&L. And we've kind of foundationally set the goal that sales-wise, we want to drive our business to grow sales faster than the market. As we're doing that and as we are investing in capabilities and efficiencies, our job is really to leverage the P&L. As those sales grow at that pace, that obviously provides you with a better ability to do that. At the same time, a lot of the initiatives that we've undertaken have been done to improve, say, distribution expenses as a rate of sales, to figure out how we can operate more efficiently in our plants. So day in and day out, we kind of operate under that financial formula to think about how we should hold ourselves accountable to managing this business, both now and, yes, going forward.

That's helpful. Looking ahead to fiscal '24, it seems you have a significant amount of new business activity, with ample cross-selling and new distribution for items in both food service and retail, including ICEE placements in food away from home venues. How should we consider your growth expectations for 2024, given this strong pipeline? Additionally, could you discuss price and volume? Are you still benefiting from pricing right now, and do you expect that growth will primarily be driven by volume moving forward?

Good questions, Jon. We feel positive about the momentum we have heading into 2024. We've discussed various areas of our business, including the cross-selling opportunities between them. Our strong relationships allow us to introduce our different products effectively, and we see that approach working well. We have a solid pipeline for 2024, which boosts our confidence. In the last quarter, we experienced significant volume increases across nearly all our categories, and we believe there's potential to maintain that trend. I'll have Ken address pricing, but it seems we have mostly overcome the previous pricing effects, and we are considering some further pricing adjustments in select areas for 2024.

Yes, Jon, if you remember from previous calls, the last price increase we implemented was around September or October. We have since surpassed that and also other previous increases, although there was a slight benefit from price increase this quarter, Q4. However, as Dan mentioned, a significant portion of our growth is now coming from volume, especially in retail. Additionally, frozen beverages saw a strong volume performance this quarter. Given the current inflation and deflation environment, we anticipate that our growth next year will lean more towards volume rather than price.

You achieved your gross margin target of reaching 30% in this fiscal year and finished strong in the second half, likely exceeding 33%. Considering the seasonality factors, is there a new interim target for gross margin, or do you see potential for further improvement in that area? I bring this up because of your comments regarding the six new production lines that are becoming more efficient and the focus on your core brands, which should be advantageous. It seems like there’s potential for additional gains in gross margin, but I want to be cautious in my assumptions. Thank you.

Right. Another good question. And we've been talking about this now for over a couple of years and our goals that Ken and I have wanted to drive the business to and to get to that 30% gross profit margin. Really proud of the teams to have followed the strategies to allow us to get there. And yes, Jon, we might be a little even more bullish there. We think our strategies are working. We think some of the new lines allow us to make products more efficiently. We think our teams are working hard in every facet and are starting to look at that 30% as a floor in which we can grow from. How quickly? Again, we have some seasonality to it. We're coming off the back end of the summer months, where Dippin' Dots and ICEE are a big part of our sales. And as you get into the winter months, that isn't as strong. But we think we can continue to grow from where we landed this year for sure.

Great. Thanks. Thank you, guys, and congrats again. Good luck.

Thank you, Jon.

Thanks, Jon.

Our next question is from Connor Rattigan with Consumer Edge. Your line is open. Please proceed.

Hey, guys. Good morning. Thanks for taking our question.

Good morning, Connor.

Good morning, Connor.

Yes. So Dan, I think I just heard you mention that you are expecting some pricing next year. So if I'm not mistaken, you guys are pretty much back to pre-pandemic margins with deflation in flux commodities. I guess just, how do you go to customers and sort of push that pricing through while they know you're experiencing deflation? And I guess maybe could you provide a little color into your visibility into your input costs for next year and maybe any hedging you have in place? And I guess should we kind of expect that deflation to continue next year? Thanks.

Good question, Connor. We are experiencing deflation in some of the areas, and yet we are having double-digit inflation in others, like sugars and sweeteners. And that impacts some of our business pieces, like the ICEE side or the Dippin' Dots side or pieces of our frozen novelties. There will be some areas that we will be able or will be taking price increases and probably needed to, maybe have needed to already. There will be other areas that we'll be taking a look at, and I'm sure we'll be challenged in, and we're prepared for those areas as they come. So there will be some pricing that we'll take. ICEE is pretty consistent about doing that at the first of the year, and I believe that we're scheduled for that again. And Ken, do you want to mention the other piece of that?

Yes. Connor, in terms of kind of covered or contracts, I couldn't say enough good things about the procurement organization, whether it's flour, whether it's sweeteners, whether it's something like eggs or whatever. I think they're managing that very well. In some cases, we've got contracts out for the next three months. In some cases, it would be six to nine months. But I think we're really well positioned to kind of maintain and manage and minimize any other inflation or maximize deflation in that, in how we buy. In terms of the outlook, I mean, that's always hard to say. You've seen different political and just international things happen that can drive things pretty quickly, whether it's the Ukraine situation. So those wild cards are still out there. But absent any of that, I think it's going to be a pretty stable environment. I mean, I don't see a lot of significant more deflation, but I think most of these categories will hold pretty well. And so I don't expect to see a lot of inflation. CPI, I think, came out yesterday at around 2%. Production CPI is generally about 150 basis points higher than that, because there's a bit of a trail there. As we look forward, I think the forecast on inflation is in that 1.5% to 2% range. So that's probably how we kind of feel about it and how we are trying to manage what we do in terms of procuring materials and how we do that.

Okay, perfect. Very thorough. And then I guess just one more for me. So Dan, in your prepared remarks, you mentioned targeting international growth, especially down in Mexico. I guess, first, can you remind us if you currently have any international operations? And I guess just, is this more of an exploratory project or should we expect this to be like a tangible 2024 impact? And then I guess just kind of stepping back as well. We've seen a lot of CPGs that are U.S. focused kind of attempt to migrate to international markets only to really run into issues gaining distribution and also experiencing some profitability challenges given the skew to more traditional retail and also just a lack of scale? I guess just sort of what is the plan in place to sort of drive that distribution growth and maybe minimize those profitability headwinds?

Yes. Down in Mexico, our operation is really centered around ICEE today, and they really had a tremendous year. They had a record year in both sales and profits, and I am proud of what that team is doing down there. We want to be able to expand on some of their business. We want to be able to maybe take some of our products that they aren't operating with today and expand them down there, such as Dippin' Dots or some of our snack food items, and think that there's a real opportunity for us to grow. We do a little business internationally today and feel like there's an opportunity for growth for us. And so for really the first time, we've brought on an international business leader to help us identify that and to do some steps along that way. I don't see that being impactful to our 2024 year. I think it will build over a period of time, and we have enough experience to know to be careful about how we do that. So we are excited about the opportunity. We are excited about the opportunity of bringing on this business leader and have had some experience with him in the past and think that he will hit the ground running for us. But I probably would caution not to be overly optimistic about that in 2024.

Okay. Got it. Sounds good to me. Thanks, guys.

Thank you, Connor.

Thanks.

Our next question comes from Todd Brooks with the Benchmark Company. Your line is open. Please proceed.

Hey. Thank you. And congrats on a strong quarter to end a strong year.

Thank you very much, Todd. It's a great way to end the year for sure.

Yes. Thank you, Todd. Good morning.

Good morning. Dan, I wanted to start off, when you started rattling off new opportunities for '24, and Jon kind of hit on this, it was quite the laundry list. I don't necessarily remember that much internal momentum at J&J. Could you maybe highlight for us the two or three most impactful opportunities as you see it for '24 that investors should be most focused on?

We have an impressive pipeline. Our Snack Foods division, under Bjoern Leyser, is doing an excellent job identifying opportunities as we enhance our capabilities to grow in our core markets. Some of the significant opportunities lie within our core strategies. I am excited about our recent product launches, such as the SuperPretzel sticks, which performed very well last quarter. I had confidence that they would be successful. We also introduced Hola! Churros, which are showing strong initial interest, and I believe they will continue to grow alongside the SuperPretzel hot dogs, both of which have excellent potential within the retail space. On the food service side, we recently conducted a test with a large sandwich chain that plans to roll out in January 2024, and I believe this could have a significant impact for us in the upcoming year. We've managed to achieve this growth due to our expanded capacity. In the bakery sector, we are reshaping our offerings, and we plan to launch some core products, including sticks and buns, which I think will present real growth opportunities in 2024. Additionally, ICEE is performing well. There’s a chance for us to win a contract with a club store to transition our machines from a crew serve to self-serve format. The early results from these tests have been very positive and could lead to increased sales. We are also in trials with a few quick-service restaurant chains that could yield promising results this year. Overall, I am optimistic about our direction. The pipeline looks strong, and our sales teams, led by Bjoern in Snack Foods, Aaron Winkelman with ICEE, and Matt Inderlied with Dippin' Dots, are all performing exceptionally well. We recently held a sales meeting where they presented their impressive pipeline, which gives us confidence as we move into 2024.

That's great. Thanks, Dan. A follow-up, you talked about the six new lines that have been put in place for the core products over the course of this year. I don't think you've ever sized the revenue unlock that those lines could represent for J&J. But can you maybe at least talk from a percentage basis, how much of the benefit was realized in fiscal '23 versus how much of that benefit you could see harvested in '24 and '25, just looking at the overall opportunity?

In 2023, we were primarily focused on building those new lines, with much of the impact coming in the latter half of the year, so it didn’t significantly affect our performance for that year. However, I believe we have a solid opportunity for growth in 2024 with the pipeline I mentioned. Some of these opportunities required the investments we made in the six new lines, and I'm pleased with their progress. Previously, we indicated that these six new lines have the potential to increase sales by $150 million or more. That’s the target we are aiming for, and I expect to see some of that impact realized in 2024 from these opportunities.

Great. And then one for Ken, and I'll jump back in queue. Jon kind of pointed out the seasonal nature of gross margins, and just wanted to see if we could maybe level set for our modeling purposes. I know last year we saw, basically, a 300 basis point-ish gross margin dip in the first half of the fiscal year versus the second half of fiscal '22. We are obviously working off a higher base. Would you expect that magnitude of retrenchment in the first half of fiscal '24 for our modeling? So kind of down to that 30% level from the 33% you put up in the back half year?

Yes. That's a good question, Todd. I think the way to think about that is you're right. As we got towards the end of this year, we got our mix humming and we got price caught up. Inflation was a bit more of our friend than it was earlier in the year. You start to see us getting to those marks that we said were goals of ours. We ended up finishing the full year at 30.1% gross margin. I think we expect to be able, as this goes forward, to get beyond that number. But yes, there is a seasonal impact. So as you look at Q1 and Q2, I think the way to think about that is the trajectory of being better than the prior year should continue. But we are not all of a sudden going to do 30% in Q1 because of the slowdown in those winter months of some of those high-margin areas like Dippin' Dots and ICEE. But we should, on kind of an equivalent improvement basis, be better than we were Q1 of a year ago and Q2 of a year ago. And then probably as we get into the back half of the year, you probably see gross margins probably pretty similar to what they were in Q3 and Q4 this year.

Okay. Perfect. Thanks, Ken.

Thank you. Our next question comes from Andrew Wolf with C.L. King. Your line is open. Please go ahead.

Good morning. And Dan, congratulations on your election to Chairman of the Board.

Thank you very much, Andrew. Good morning to you as well. Thanks for joining us.

So I wanted to ask, given the current grocery environment, you guys are having good volume growth, particularly shipping and on the shelves, I assume. But as you look to the current planning year, fiscal '24, is it fair to say the predominant or maybe even all of the planned volume is going to come from new doors and new distribution, maybe line extensions? Or are you guys planning any velocity gains as you kind of ramp up the marketing spend as well?

I think we'll have a little bit of both. I do think we have some great opportunities for continued expansion on some of our core products, like what we talked about, the pretzel sticks. I believe that will continue to grow. I think Luigi's is continuing to grow. Our ICEE frozen novelty is growing well, so I think we'll have that continue. Dogsters is doing really well. Dogsters did well in the fourth quarter, and I think we have some good opportunities for new outlets with that. But I also think that we'll see a little bit of increase in some of our core products too. I think we fit a niche in an area that allows us to be able to do that. We're watching that consumer closely and watching what others are saying and doing, and we'll be prepared for whatever headwind comes our way. But we think we have some good opportunities for continuing to grow volume with what we have today, but also by garnishing new outlets as well.

Okay. And I also wanted to kind of follow up to Todd's questioning on the unlock. When you get the third RDC open on Dippin' Dots, you've referenced a few times that business needs national frozen capability to be fully distributed. Any chance you could help us feel how much the addressable market increases or what it does for the business, either quantitatively or qualitatively, in terms of how much more of the market you can go after?

I love what the team is doing at Dippin' Dots. We had the best year in sales and profits in its history and feel like we're still just scratching the surface. That team's really gelling together and fits really nicely. Synergies from their organization to ours are just fitting good. I love what they have in test today. I talked about this in the opening. The Regal Theater now is pretty much completely rolled out. A couple of other big theater chains are expanding their tests, and the team is out there knocking on a lot of doors and having some great success. I think that will continue to grow nicely for us. I'm really happy with that acquisition. Ken, I don't know if you want to add any color to that at all.

I think Dan summarized it well. I think the thing to think about with Dippin' Dots is, one, we just came out of having them for a full year. We’ll have, I think we even mentioned this, double-digit growth in that business. We would expect to be able to grow that business next year double digits. Production capacity, we have plenty of capacity to hit those numbers and produce that. It was really the freezer and storage space that we had to address to be able to move faster and keep up with that growth. With the added freezer space at Terrell and at Woolwich, the two facilities that are now open, we feel really good about really meeting any kind of opportunity in the foreseeable future. I don't have an exact number on what that means. All I can tell you is it's a part of the enablement of helping us continue to grow this business double digits.

Okay. Fair enough. And the last thing is for you, Ken, as well. Could you just size up the true-up expense that you had to record against sales and tell us if that was also a full flow-through as a reduction to earnings as well, the cost-plus arrangement in the handhelds?

Oh, yes. The way to speak to that, I think we may have said this before, Andrew, is we have an agreement with a customer that we make handheld for, where we pass on any cost increases or decreases. It's a quarterly true-up. But that customer, as you can probably appreciate, really benefited us when we were going through 20-plus-percent inflation. But now that we've had deflation, we've passed those cost reductions back to that customer, but the profit of that stays whole. So we continue to make the same profit because we're locked into a profit margin in the contract, and the volume of those core SKUs continues to grow.

Got it. Thank you.

Thank you. Our next question comes from Robert Dickerson with Jefferies. Your line is open. Please go ahead.

Great. Thanks so much. So guys, I'm just curious. Maybe it's on me, but I didn't really realize there was going to be a 53rd week. So once we back out 53rd week, right, you get to sales growth about 4% in a quarter. And while I respect it, you don't always break out kind of price and volume relative to other companies. I'm just curious, could you maybe add some color? Would you say, of the 4%, like most of that still is pricing? I'm just trying to gauge kind of volume trajectory, especially just vis-a-vis kind of the overall backdrop we are seeing right now and kind of much of food in the U.S.

Yes. Let me kind of explain it this way. And there's a lot into that in terms of really trying to narrow down to the puts and takes of one extra week. We summarize that in the release based on our business overall. But if you take two parts of our business, retail and frozen beverages, both up over 20%. You back out the extra week, both of those businesses were up double digits, and both would have been at or near double-digit volume growth. So very healthy quarters there. If you look at food service, it came in at 5.3%, but you've got the handheld negative against that that I just explained to Andrew, which was really more of a cost pass-through, not a volume thing. You start to break that out. Food service would have grown 8.5% without that effect. If you focus on the core categories in food service, pretzels, churros, and frozen novelties, those are up 11.5%. So you start to see, even peeling back the extra week, a very strong quarter and really volumes up across the board, probably other than bakery. And that's really a part of what we've been talking about. In bakery, we've been dialing in on SKUs and getting out of some SKUs that weren't profitable. So that's probably the best way to think about each of those segments and the 53rd week.

Okay. Great. So kind of net-net, still positive volume growth, kind of despite pricing you've taken, kind of overall?

Yes. Absolutely.

That's great. I'm interested in your insights on current consumer behavior. Some confection companies have indicated they've noticed some pressure, suggesting consumers are focusing on products that offer more value. We've seen shifts across channels, with Walmart mentioning they experienced some pressure in the last weeks of the quarter. However, it appears that consumers continue to visit places like Wawa for snacks or go to movie theaters for drinks. I'm curious about your perspective on consumption behavior related to your product. How are you managing to maintain volume growth? Is it due to the perceived value and taste? Any information you could provide would be appreciated. Thank you.

Right. Good morning, Rob. How are you doing?

I'm great. Thank you.

I think it's a great question and something we anticipated. We are closely monitoring customer and consumer behavior. We have faced several challenges since taking this position, but we are ready to adapt in any way necessary. We often discuss the strength of the J&J portfolio. We have a wide array of products across various channels, many of which have strong brand loyalty and are seen as treats or rewards. I believe that this diversification is what helps us remain strong during challenging times. Even under our leadership, there have been instances when theater business declined while retail business thrived, and then there are times like last year when theaters performed well but we faced challenges in other areas. We take pride in our diverse offerings and the loyalty of our brands, which help us endure tough periods.

All right. Super. Fair enough. Thank you, guys.

Thank you, Rob.

Thanks, Rob.

Thank you. And I would now like to turn the conference back over to Dan Fachner for any closing remarks.

Great. Thank you very much. In closing, in 2023, we delivered the strongest year in the history of the company. It took tremendous hard work, perseverance, and agility from every one of our employees and partners. And I could not be prouder of what we have accomplished or more excited about what lies ahead. We expect to deliver another year of strong sales and earnings growth in fiscal 2024 as we invest in our amazing portfolio of brands, additional capacity, and capabilities. We look forward to updating you on our progress in the new year. Have a wonderful Thanksgiving and holiday season. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.